End of an Era or Bright New Day: New Netflix Subscription Pricing Starts Thursday

by Anthony John Agnello | August 31, 2011 9:29 am

Thursday is the day the sky falls, the seas boil, and dogs and cats begin living together. At least that’s the case according to the 83,000 Netflix (NASDAQ:NFLX[1]) subscribers that stormed the Internet on Aug. 5 to post angry comments on the streaming video company’s Facebook page and official blog. Those loyal — not to mention entitled — customers were incensed after the company announced in July that it was overhauling the structure and pricing of subscriptions to its service. The change finally goes into effect tomorrow.

Instead of paying $9.99 per month for one by-mail DVD rental and unlimited access to Netflix’s streaming movies and television across many platforms — from Apple‘s (NASDAQ:AAPL[2]) iPhone to Microsoft‘s (NASDAQ:MSFT[3]) Xbox 360 — Netflix users must now pay $7.99 for each individual service. Many more subscribers have voiced their outrage over the change since that initial announcement. From their point of view, the shift represents what is close to an unprecedented 50% increase in subscription fees.

Investors understandably are skittish about the change. Since the announcement, Netflix shares have fallen from an all-time high of nearly $305 to $205 by Aug. 22. According to research firm The Diffusion Group, Netflix might shed as many as 2.5 million yearly subscribers[4] to its service because of the change, which would be an estimated loss of $300 million in annual revenue.

Netflix already is rebounding, though, with shares trading around $236 as of Tuesday’s market close. The Diffusion Group’s estimates also represent a worst-case scenario — they presuppose Netflix won’t gain millions more subscribers to replace any that decide to jump ship following the subscription change. Given the new content that likely will come[5] to Netflix’s streaming service following the change, subscriber growth is practically a guarantee.

Here are the facts: Netflix began preparing both its subscribers and its investors for this change almost a year in advance. Company CEO Reed Hastings made subtle but clear statements during an earnings conference call in October 2010, describing Netflix for the first time[6] as “a streaming company, which also offers DVD by mail.” This coincided with Netflix testing a $7.99 streaming-only subscription option in the U.S. — a model that now will be Netflix’s primary business.

DVD and Blu-ray rentals and sales might not be dead yet[7], but they certainly can’t sustain the home video market by themselves. Netflix’s growth from 10 million subscribers in 2009 — just one year after it began offering streaming video on a few platforms — to around 25 million today guaranteed that streaming video will be the primary business model for home video going forward. The change in subscription pricing was inevitable and represents the next phase in a strong company’s promising evolution.

There is more on Netflix’s horizon than a pricing shakeup. The company already is testing new interfaces[8] that likely will lead to a wider variety of streaming subscription packages, such as family plans. When Netflix begins diversifying its services, increasing prices slightly in addition to offering a wider selection of titles, it finally will be on its way to competing head-to-head with cable providers like Time Warner (NYSE:TWX[9]) that have grown rich by offering its audience variety through premium services.

That loud bang on Thursday morning won’t be the sound of a 21-gun salute for Netflix. It’ll be the sound of a starting gun.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello[10] and become a fan of InvestorPlace on Facebook[11].